WestJet inching toward expanding international service with widebody aircraft

WestJet Airlines says it could take its rivalry with Air Canada overseas by launching an international service using large widebody aircraft.

The Calgary-based airline said Tuesday the new service could be in place in 1 1/2 to three-and-a-half years, if its board gives the green light. WestJet has been discussing the move with its pilots and also meeting with potential airplane lessors and manufacturers.

"So no decision made yet but we're getting all the pieces in place to be able to make a good decision," president and CEO Gregg Saretsky said during a conference call to discuss its first-quarter results, which saw a lower profit.

WestJet (TSX:WJA) is already getting into the European market by launching service next month to Dublin, Ireland, from St. John's, using its narrowbody Boeing 737 aircraft. It said demand is so strong the seasonal service will be extended by about three weeks to Oct. 25.

"All of that gives us great confidence that there is strong demand for a value-based international product that WestJet is looking to pursue," Saretsky said before the airline's annual meeting in Toronto.

He declined to say how many large planes could be added to its fleet, or which destinations could be served.

"Obviously, we are looking for markets that are burdened by very high airfares and there are lots of those in the international space so there are opportunities across many geographies."

Expanding its global footprint would allow Canada's second-largest airline to challenge carriers like Air Canada (TSX:AC.B) and tour operators including Transat (TSX:TRZ.B), which fly large planes to many destinations including Europe.

While it assesses this new opportunity, WestJet said it is also upgrading its technology before deciding later this year whether to add a fee for first checked bags.

Saretsky said the decision by Porter Airlines to begin charging $25 for the first bag and $35 for a second bag checked on domestic travel is "indicative of the steps that airlines are needing to take to offset the headwinds that we're all facing."

The airline's net profit fell two per cent to $89.3 million from $91.1 million a year earlier. It earned 69 cents per diluted share for the period ended March 31, one cent above last year. Adjusting for one time items, it earned 59 cents per share, four cents less than forecasted by analysts polled by Thomson Reuters. Revenues surpassed $1 billion, increasing 7.7 per cent from last year.

After a two per cent fare increase in February, WestJet has selectively increased fares in markets where demand is strong. Ancillary fees increased 28 per cent to $10.55 per passenger in the quarter, with the prospect for $80 million being collected for the full year. Charges including for changing and cancelling flights, pre-reserving seats and buying food are designed to offset higher costs and the impact of the lower Canadian dollar.

However, the airline said it has no plans to introduce a currency surcharge as some charter operators have done.

At the same time, WestJet continues to cut costs, trimming $125 million this year, above its $100 million target and a year ahead of schedule. It hasn't announced any new target for additional efforts.

Meanwhile, WestJet said it was disappointed by the Ontario Liberal government's budget proposal to increase fuel taxes. The four cents per litre increase to be phased in over four years would cost the airline about $13 million.

Chief financial officer Vito Culmone said the tax doesn't make it easier for Canadians to access low-cost fares without crossing the U.S. border.

More than one million Ontarians fly out of Buffalo each year, which reduces the use of taxis, restaurants and hotels in Canada, added Saretsky, who noted that a more "progressive" government in British Columbia has eliminated the fuel tax on its international itineraries from Vancouver.

"So it's a much bigger issue than aviation, it really is a transportation issue and not very progressive."

The airline said the quarterly results include pre-tax recoveries of value-added taxes of $17.6 million associated with fuel costs and $2.5 million associated with airport costs from 2009 to 2013. Severe weather in January cost between $3 million and $6 million while the lower loonie had a $33-million negative impact.

WestJet said it will purchase up to two million of its shares in the coming year, about 30 per cent less than the nearly 5.7 million shares it bought last year.

It also announced the further roll out of its Encore regional service in Eastern Canada with the launch of twice-daily service between Toronto and Quebec City as of next March using Bombardier Q400s.

Walter Spracklin of RBC Capital Markets said the revenue trends are more positive than he initially thought, while costs aren't as bad as feared.

"We were very encouraged to hear the CEO speak to a much improved traffic and yield environment," he wrote in a report. "There was some focus on the call with regards to a wide-body fleet, which may be met with some uncertainty by the market — but nevertheless, we consider the quarter to be a net positive from a trend basis."

On the Toronto Stock Exchange, WestJet's shares lost 37 cents at $24.60 in Tuesday morning trading.